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Rescission of off-the-plan contracts under sunset clauses

by Chris Drayton

26 February 2016

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The courts' view

The Conveyancing Amendment (Sunset Clauses) Act 2015 passed on 17 November 2015 requires vendors to either obtain the consent of purchasers before they can rescind an off-the-plan contract in reliance on a sunset clause in the contract, or to obtain the permission of the Supreme Court to do so.

The legislation was applied in the recent Supreme Court case of Jobema Developments Pty Limited v Zhu & Ors [2016] NSWSC 3 , in which the Court rejected the vendor's application to rescind a contract pursuant to a sunset clause.

The plaintiff vendor had purchased a development site from a previous developer of the site (Xycom), subject to a number of off-the-plan contracts for sale of units in the development, which Xycom had entered into with various parties including the defendant (Wu).

At the time the plaintiff purchased the site a deed of assignment of contract was entered into between the plaintiff, Wu and Xycom, in which the plaintiff agreed to assume Xycom's obligations under the contract for sale with Wu.

The plaintiff then sought to rescind the contract with Wu, purporting to rely on a sunset clause for registration of the plan of subdivision.

Wu did not provide his consent to the rescission and the plaintiff applied to the Supreme Court under section 66ZL of the Conveyancing Act seeking the Court's permission to rescind the contract pursuant to the sunset clause contained in the contract.

In considering the plaintiff's application the Court took into account the prescribed factors specified in s66ZL(7) of the Act and the case serves as guidance as to how the Court is likely to interpret the provisions of the Act.

Terms of the contract

Clause 34.2 of the contract with Wu required the vendor to use reasonable endeavours to have the plan registered on or before the sunset date of 31 December 2015. The Court accepted that the delay in registration was caused by Xycom, however noted that despite this the plaintiff had assumed the previous developer's obligations under the contract when it bought the site and could therefore not rely on the previous delay by Xycom to support its application for the permission of the Court to rescind.

Whether the vendor acted unreasonably or in bad faith

The Court found that the plaintiff had not acted unreasonably or in bad faith.

Reason for delay in creating the subject lot

The Court considered the reason for delay in creating the lot, and ruled that the plaintiff could not rely on the fact that it did not cause the delay, but Xycom did, to support its application to rescind the contract.

Date the lot will be created

The Court accepted the plaintiff's evidence that the date the lot would be created was likely to be mid-2017.

Whether the lot has increased in value

The plaintiff submitted the relevant lot had increased in value and whilst accepting this, the Court was of the view that this acted against the plaintiff's application rather than assisting it.

It should be noted that a primary motive for the legislation being introduced was to prevent developers from using sunset clauses as a way of rescinding off-the-plan contracts specifically for financial gain.

Effect of the rescission on the purchaser

The Court did not consider this factor in any detail, as there was no evidence in relation to it other than that Wu had not given his consent.

Any other matter the Court considers relevant; any other matter prescribed by the regulations

There were no regulations made at the time of the decision.

The Court considered other relevant matters raised by the plaintiff. The plaintiff stated that construction costs had increased and that the contract did not meet the financial requirements for it to obtain funding for the project, so that it needed to rescind the "old" contracts entered into by Xycom and enter into new contracts at higher prices in order to obtain finance. The Court rejected that argument on the basis that evidence appeared to suggest that the plaintiff had already obtained construction finance given that construction was under way, and that if it did not enter into contracts for higher prices it would have to contribute additional capital to meet its lender's requirements, rather than be denied finance, and also added that financial risk was something that any business entity assumed when buying property.

The Court accepted that the plaintiff had been diligent in progressing construction since it purchased the site, but ruled that it could not rely on its diligence and ignore Xycom's lack of diligence until it purchased the site to support its application, as it had expressly agreed to assume Xycom's obligations under the contract for sale.

It is relevant to note that the Court viewed the deed of assignment of contract between the plaintiff, Wu and Xycom as a novation and not an assignment (despite the title of the document) because the deed provided for the plaintiff to assume Xycom's obligations under the contract for sale with Wu as if it had entered into that contract in place of Xycom. As the Court appears to have rejected a number of the arguments put forward by the plaintiff in support of its application to rescind the contract on the basis that Xycom's obligations had been novated to the plaintiff rather than assigned, the question does arise whether the Court's decision would have been different had the deed been viewed as an assignment rather than a novation. In our view, based on the objective of the provisions and the factual situation, we expect the outcome would have been no different.

The decision serves as important guidance as to how these recent amendments will be interpreted and this initial interpretation is consistent with the objectives of the amendments.

Please contact us should you require any assistance in relation to off-the-plan sales or purchases.